GBP CAD Exchange Rate Outlook Darkens as UK Inflation Misses Forecast

The outlook for the GBP CAD exchange rate grew somewhat darker today as markets responded to a below-forecast UK inflation print and news that a group of Conservative MP’s have agreed to sign a letter of no confidence in UK Prime Minister Theresa May.

Inflation in the UK held steady at its five-and-half year high of 3.0% in October, missing the Bank of England’s (BoE) forecast of a 3.1% climb and curbing any expectations that might have remained that the BoE will move hawkishly in 2018 to combat potential soaring levels of inflation.

The report, coming from the Office for National Statistics (ONS), also reinforced various doubts that the BoE’s decision to raise interest rates in November was mistaken, with the UK’s economy being sluggish and import prices already being high.

The ONS claimed that the steady reading was reflective of the higher cost of food being offset by falling fuel prices.

This reading leaves the outlook for GBP CAD somewhat sapped, with many economists having previously criticised the BoE’s rate decision on claims that the soaring levels of inflation were already on track to fall.

The BoE, on the other hand, has asserted that leaving the EU is going to hurt Britain’s ability to grow without fostering an excess of inflation, hence justifying the rate hike.

Nonetheless, this inflation print is liable to represent something of a peak, with economists now expecting headline CPI to trend lower and lower into Q1 next year.

James Smith from ING shared this sentiment, stating:

‘Over coming months, we expect headline CPI to trend lower, reaching the 2.3/2.4 per cent area by Easter time. As the currency effect starts to peter out, the question is whether domestically-generated price pressures start to take over’.

Across the pond, however, inflation is expected to contract, with Friday’s inflation for Canada forecast to drop from 1.6% to 1.4%.

If this occurs then GBP CAD may find some short-term purchase, as it could perceivably further delay the Bank of Canada’s (BoC) cycle of monetary tightening.

Possible Vote of No Confidence in May Leaves GBP CAD Exchange Rates Encumbered

The outlook for the Pound has also been hurt by recent reports that 40 Conservative MP’s claim they would be willing to sign a letter of no confidence in Theresa May, raising the possibility that her position as Prime Minister may soon be threatened.

Tory rules dictate that if 48 MP’s sign and deliver a letter of no confidence to the chair of the backbench 1922 Committee a vote will be initiated on May’s leadership.

This isn’t the first time that this has occurred for May, however, with Grant Shapps, former Conservative Chairman, having tried to initiate a coup last month, claiming that he had 30 supporters willing to sign such an agreement. It should be noted though that this claim was never substantiated.

Such a prospect, if successful, threatens to destabilise the UK’s political standing at a particularly sensitive time – with Brexit negotiations requiring stability of leadership.

Markets are also concerned that May could be replaced either by a ‘hard-Brexit’ candidate or indeed a Labour victory.

These worries hurt the outlook for GBP CAD, with the latest news that Parliament will be given a chance to vote on the final Brexit deal before the UK leaves the EU also adding to the current unpredictable tempest of UK politics.

Crude Oil Prices Tempered by Caution, CAD Liable to Grow Volatile

The outlook for the Canadian Dollar, on the other hand, remains somewhat mixed, with fresh optimism that OPEC-led production cuts will continue to strangle the gap between crude oil supply and demand now being negated by rising output from the US.

The US oil output C-OUT-T-EIA demonstrated growth of more than 14% since mid-2016, hitting a record 9.62 million barrels per day.

Beyond this, the US government claimed yesterday that December’s US shale production is on track to rise for a 12th consecutive month.

Nonetheless, some traders remain sceptical that oil prices will soon drop, claiming that the work of OPEC in limiting supply restrictions continues to help reduce the global glut.

If OPEC is indeed successful in keeping supply limited then the GBP CAD exchange rate could come under pressure in the coming weeks.

If crude oil does fall however, then the Pound may find the opportunity it needs to take the lead.